Interpreting Bond Yields in Explanations of the 1987 Stock Crash

Summary

The document asks whether the sharp rise in long-term US Treasury yields during 1987 should be treated as a key cause of the stock market crash. It reports that the 30-year yield rose from 7.29% in January to 10.25% on October 19, a change of 296 basis points, and challenges a causal interpretation of that movement.

The answer argues that rising yields did not cause the crash. Instead, it points to high equity valuations before the event, despite a solid macroeconomic backdrop, followed by fading growth and optimism that contributed to financial strains ahead of Black Monday. The reply offers a brief alternative narrative rather than detailed empirical evidence, so it does not establish a definitive causal account or quantify the proposed channels.

Key ideas

• The document questions whether rising long-term Treasury yields caused the 1987 stock crash.
• It reports a 296 basis point rise in the 30-year Treasury yield over the stated dates.
• The response attributes greater importance to elevated equity valuations and weakening growth expectations.
• The alternative explanation is asserted briefly and is not supported by detailed empirical analysis.

Tags

# Shift from stocks to bonds in the 1987 crash


# Shift from stocks to bonds in the 1987 crash












I read that a potential reason for the stock market panic of 1987 could be the rapidly increasing long term US interest rates: the yield of 30Y US Treasury Bonds increased from the low of the year, 7.29% on 9th of January 1987 to the high of the year 10.25% on 19th of October 1987, an increase of 296 basis points.

Why this should be advanced as one of the key causes for the crash?

## Answer by Joel Alcedo (score 1, accepted)

https://quant.stackexchange.com/a/49619

The rise in yields were not a cause of the crash.

Global equity valuations were very high leading up to the crash against a solid macroeconomic backdrop in the years preceding. Eventually, growth began to fade and optimism did as well, feeding into the financial channels leading up to black Monday.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.